Impulse Response Function Analysis: An Application to Macroeconomic Data of Pakistan

Impulse response function (IRF) is increasingly common in financial markets; it is significantly related to policy changes of Government or the firm. An IRF of any dynamic model is its reaction to some external fluctuations emerged with brief input signals over time. It is a way to examine and evaluate the impact of external shocks. To make a comprehensive view of Pakistan’s macroeconomy, six typical macroeconomic indicators focused for analysis. In this study the impact of one variable to all other variables with respect to external shocks has valued description with the help of VAR model. By the help of IRF it can be concluded that exchange rate, Import rate, export rate and money supply in Pakistan have strong relation between themand show a considerable reaction in future for the impulses occur in each other so the model of these four variables have sound predictive validity and used for better forecast.